Long Run Economic Growth

Modules 37-40

Outline1. What constitutes long run economic

growth?2. What are the causes of long run

growth?3. How do we measure growth in real

terms?4. What are the impediments to long run

growth?

Long Run Growth

• Changes in AD and SRAS can increase GDP in the short run

• But absent any change in LRAS, GDP returns to potential output

Figure 40.6 From the Short Run to the Long RunRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Long Run Growth

• Long run growth is represented by a rightward shift in LRAS

• Potential Output has increased

• Increase in Capital, Labor or productivity

Figure 40.5 Long-run Growth and the LRAS CurveRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Aggregate Production Function

• Relationship between technology, capital and labor– At given amounts, we will have a limit to

production

• We can create a PPC using this

Figure 40.3 The Trade-off Between Investment and Consumer GoodsRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Aggregate PPC

Long Run Growth

• So long run growth can also be represented by a shift in the Aggregate PPC

• In other words, we can increase capital, labor or improve technology– In absolute terms (more of them)– Through productivity (each unit does more)

Productivity

• Increases in per unit output– Total Factor Productivity

• Physical capital per worker• Human capital per worker• Technology

• Increases in physical capital have diminishing marginal returns

• Technology is key

Figure 38.2 Technological Progress and Productivity GrowthRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Measuring Growth

• Does increasing GDP mean we are better off economically?

• If population increases proportionally to GDP, we are no better off

• Better measure is Real GDP per capita

Table 37.1 U.S. Real GDP per CapitaRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Rule of 70

Estimate of doubling time for economy

Number of years to double =70 divided by annual growth rate

So an economy growing at 5% will double in (70/5) or 14 years

Figure 37.2 Incomes Around the World, 2008Ray and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Convergence Hypothesis

• Differences in Real GDP per capita tend to narrow over time

• True for many countries, but others seem stuck at low levels

Figure 38.3 Success and DisappointmentRay and Anderson: Krugman’s Macroeconomics for AP, First EditionCopyright © 2011 by Worth Publishers

Why some lag behind?

• Lack of capital investment– Resource-dependence– Income inequality

• Lack of human capital development

• Lack of political stability

Sustainability

• Must we trade off between economic growth and response to climate change?

• Not necessarily – technology/ideas are there– Innovations spurred by conservation/reducing

emissions– Problem is political